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June 12, 2020

The FDIC’s Proposal on Brokered Deposits Will Weaken Banks and Cost Taxpayers Money—For No Good Reason

Washington, D.C.  –  Stephen W. Hall, Legal Director and Securities Specialist for Better Markets, issued the following statement on the comment letter filed with the Federal Deposit Insurance Corporation (FDIC), which would give less than well-capitalized banks more access to risky brokered deposits:
“This proposal is a classic example of arbitrary and capricious rulemaking. It tears huge holes in the rule that sensibly limits the ability of banks with less than stellar capital levels to accept brokered deposits, all without any credible justification. 
“Brokered deposits originated as funds that “deposit brokers” place with banks to secure the highest possible interest rates and the most deposit insurance coverage for their clients. They’re attractive to banks, especially the ones under stress seeking quick infusions of money. But they’re also dangerous, since they can be withdrawn quickly if competing institutions offer better deals. We know they pose risks because brokered deposits contributed to bank failures during the savings and loan crisis and again during the 2008 financial crisis. That’s why in 1989, Congress limited the ability of less-than-well-capitalized banks to accept these deposits, banning them outright for the weakest banks.
“Now the FDIC has decided to weaken those restrictions, proposing massive loopholes that will ultimately undermine already weak banks and threaten the deposit insurance fund that protects Americans’ bank balances. For example, it would exempt up to 25 percent of a money manager’s funds—potentially vast sums in this day and age—with no questions asked about the purpose of those bank deposits or whether they really help the fintech companies that the FDIC says it cares about. 
“Amazingly, the FDIC offers no good reason for the changes in its proposal and admits that it can’t reliably claim the proposal will produce any benefits. It simply claims that it’s time to update the rule in light of new technologies in banking and finance. But even modern forms of brokered deposits can pose risks to banks. In any event, the FDIC’s primary duty is to protect bank customer deposits and prevent  losses to the DIF from bank failures, not cater to the fintech industry’s desire to increase its business prospects. To top it off, fintech firms don’t really need this proposal since the vast majority of banks are well-capitalized and can accept brokered deposits without restrictions.
“In our comment letter, we urge the FDIC to abandon the proposal. Should it choose to go ahead, it must at least strengthen key elements, which we identify in our letter. We also show that the proposal is vulnerable to legal challenge under the Administrative Procedure Act, since the record shows that this de-regulatory measure makes no sense, especially at a time of historic financial instability when banks increasingly under stress may be tempted to resort to dangerous brokered deposits.”
Better Markets is a non-profit, non-partisan, and independent organization founded in the wake of the 2008 financial crisis to promote the public interest in the financial markets, support the financial reform of Wall Street and make our financial system work for all Americans again. Better Markets works with allies – including many in finance – to promote pro-market, pro-business and pro-growth policies that help build a stronger, safer financial system that protects and promotes Americans’ jobs, savings, retirements and more. To learn more, visit
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